There is no question the economy is in the tank, but it is not because banks didn’t have money to lend. The economy tanked, according to economist Dean Baker, because the $6T housing bubble and $8T stock market bubbles burst.

People felt broke after their imagined wealth went poof. They pulled in their horns.

Wrote Holland:

“Much of the economic growth of the Bush era existed on paper only, built on the rise of a massive bubble in real estate values rather than growth in productive industries. When all the ephemeral wealth vaporized—and with the economy shedding jobs like a dog with dermatitis---consumers stopped buying and businesses, anticipating a long slowdown, stopped seeking the loans that they might have otherwise tapped to expand their operations.”

Holland notes that consumer dollars drive 70 percent of the U.S. economy. Much of that spending was financed by people taking chunks of equity out of their homes. “People might have been eating in fancy restaurants, but they were essentially eating their living rooms to do so,” he wrote.

Financial sanity finally prevailed. Banks stopped making loans because nobody was asking for them. Though mortgage rates plummeted, the number of applications fell in lockstep. That, to Baker, is the “most glaring refutation of the claim that people are unable to get credit.”

The specter of a banking collapse was largely concocted. Bankers rejoiced as federal funds flowed to the banks, which in turn, used the money to shore up balance sheets and fund war chests for future acquisitions. Fortified by those taxpayer dollars, bankers used the “crisis” to lay off thousands of taxpayers.

It’s now up to President-elect Obama to clean up the mess. His $750B public works plan to revitalize the economy is based on building real things like roads and bridges. That's a far cry from smoke and mirrors of the past eight years.

Holland isn’t very far out on a limb with the idea that the trillion-dollar bailout was the exiting Bush Administration’s parting gift to the financial sector. After all, the White House sold the public a war based on the phony threat of weapons of mass destruction. Team Bush pushed the idea of Al-Qaida “sleeper cells” in the U.S. to win support for the Patriot Act.

A trillion-dollar scam is little more than a walk in the park for these guys.